No Pain? No Gain!

BLOG VIEW: (Blog View columnist Phil Hall is on assignment this week at the Mortgage Bankers Association's Annual Convention & Expo. His column will resume next week. This week's guest column is authored by Scott Everett, CEO of Supreme Lending, headquartered in Dallas.)

There's an old saying that time heals all wounds. I know that this platitude is intended to be inspirational – but when it comes to the mortgage industry, I'm not sure that healing our wounds is such a good thing. It's certainly not a benefit if we move forward with the excitement of relief, rather than the discretion of recent injuries.

Of course, I'm not suggesting that our industry should be confined to constant suffering. Actually, I'm suggesting quite the contrary. If our industry responds naturally to the pain of the market's new challenges – like a perceived shortage of secondary market investors – we will not only heal our wounds, but also keep ourselves from sustaining the same or similar injuries in the future.

We are riding the wave of a major crisis that hurt individuals, businesses, the U.S. economy and global economies. Secondary market investors seemed to dissolve into thin air, the government took over and originators were forced to make some drastic adjustments.

This is where our pain first surfaced, but there was something more painful bubbling under the surface. With secondary investors stepping out and the government stepping in, program guidelines took a 180-degree turn. All of a sudden, we were in a new climate – one that was requiring a lot of extra effort just to get a deal done.

Pain, in its most basic form, occurs for a reason and is actually an indication that something is wrong. It's nature's way of keeping us on track. It helps protect us, keeps us safe and reminds us to proceed with caution. In an ideal world, it keeps us from making the same mistake twice. And the last time I checked, that's not a bad thing.

I'm going to say the unpopular thing: Perhaps when it comes to the secondary market, we need to keep feeling whatever amount of pain it takes to stay cautious and careful about how we originate and transact loans.

Whether we ride out the pain until we learn our lessons or start aggressively courting the secondary market, we'll need to engage in safe lending practices – and we can't rely on guidelines to force us to do so. There are a lot of ingredients in the magic formula that will bring investors back into our marketplace, many of which we can't control.

For one thing, we'd need interest rates to increase. It's not likely that many new or returning investors would invest in a product that produces the types of returns that today's market offers. Consumer confidence also has to increase, and banks have to stop keeping their surpluses in reserve. Plus, the government needs to decide what it's going to do with the government-sponsored enterprises.

Assuming that interest rates are attractive enough for investors and all of the other pieces are in place, we need to have instilled enough confidence in potential investors that they know, beyond a shadow of a doubt, that the loans we're making are safe. Fortunately, this is something over which we do have a certain amount of control.

The bottom line is simple: Investors need to know that every borrower intends to repay his or her indebtedness on every loan being made. The origination sector has made huge strides in this area and is upholding its part of the program. In fact, the quality of loans has shot up considerably – we're probably originating the most stable loans the industry has seen in the last 25 years – or maybe ever.

Even so, we can't expect investors to take our word for it when we vouch for the quality of our loans. They lost trust when they lost their fortunes, and they're not about to nod their heads and take our word as gospel. They will, however, believe what they see for themselves.

If we want to prove that the underlying loans in pools are stable, we need to have transparency throughout the entire process. We need to give investors the ability to see, evaluate, inspect and review the actual loans, or at least have a neutral third-party agent do this and report back.

Making the mortgage market attractive to investors is going to take a lot of work, and there are still a lot of factors that are out of our control. We just need to stop focusing on the end goal of bringing secondary investors back to the market, and instead put our focus on transacting the safest, highest-quality loans possible. Sure, time heals all wounds. But it's quality, rather than time, that will ultimately resuscitate the secondary market.

As unpopular as it may sound right now, if the pain of tightened regulations and limited loan products leads us to quality, it has served its purpose by keeping our industry safe from further distress.


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